November - 2009 Economic Brief
Perspectives:
The Bureau of Economic Analysis (BEA) released the advance GDP numbers for 3Q09, and they showed the economy grew at an estimated annual rate of 3.5%.
• Cash for Clunkers program added 1.66 percentage points to the Q3 change in real GDP.
• The change in non-farm inventories added 0.91 percentage points to the third-quarter change in real GDP and reflects inventory replenishing after the last three consecutive quarters saw very low restocking of inventory.
Just for fun, let’s see what the number would have been without these extraordinary events. Reducing the 3.5% advance GDP number by the approximately 1.47% artificial boost from the Clunkers scheme (1.66% - 0.19%), and 0.66% for inventory build-up (third-quarter trend is roughly 0.25%), gives us a rounded figure of 1.4%.
But wait, there’s more... the average revision from the advance GDP (what was just reported) to the final (what will be reported in two months) is ±1.3%. So the “un-juiced” number we just calculated is almost within the margin for error.
Now for the really bad news in the GDP: Real disposable personal income decreased 3.4%.
One guess not subject to error is that 4Q09 GDP, unless Washington rolls out some other spending-inducing programs, is almost certain to be far lower.
Why gold?
Since 2003, the U.S. dollar has lost a whopping 25 % of its value relative to a basket of major world currencies — but gold has more than TRIPLED, so today's 10,000 Dow is, in actual fact, worth 7,500.
"Plus ça change, plus c'est la même chose."
Nobody really knows how much gold there is, but the most reasonable estimates are something like six to eight billion ounces. Out of this, the U.S. government reports that it has 265 million ounces of gold in its treasury.
If we divide the money supply by the number of ounces the U.S. could back its paper with (and nobody, including the Federal Reserve, actually knows how much money they have floating around out there... more on the audit later, think Ron Paul).
Let’s estimate that M0 in the U.S., the narrowest measure of money supply that consists of just notes and coins, amounts to one trillion. So, 265 million into seven trillion gives you about $26,420 dollars per ounce of gold.
Now, if we add in the total obligations of the U.S. government, which it will either need to print more money to meet, or it will have to default on – that’s about 100 trillion. If those dollars are printed, that would give us $377,430 per ounce. The same ratio for M1 would give you about $6,226 per ounce and M2 would give you $31,320per ounce.
All of these numbers are far, far above the current level of roughly $1,000 per ounce.
The mainstream headlines will tell you that stocks – as measured by the S&P 500 – are up 18% this year. But gold is up 23% in the same time. So in terms of real wealth, stocks have actually decreased this year.
Dollars are flooding the market, but they're worth less and less.
Why do the media conceal and manipulate the facts?
The mainstream media shows a clear bias to report good news about the economy. And when there is no good news to report? They find a glimmer of improvement and put it in the headline… even when the rest of the article shows nothing but deterioration.
So what is their motivation?
The media is motivated to appease their advertisers, most of which depend on you continuing to spend money and keeping your investments in the market. And don’t forget, the media are also tools of their owners. That’s why you didn’t hear CNBC criticize General Electric (their parent company) for having to go hat in hand to the government for a $140 billion bailout. Finally, it can’t be ignored that the media is giving the new administration a pass, trying to make it appear that the stimulus and bailouts are working.
Over the last 10 years, while the dollar has lost 36 percent of its value, have you seen or heard Washington do anything to prevent the dollar's decline? From the Roman times to the modern day, inflating away debt problems by devaluing currencies has been part and parcel of every government on the planet. The U.S. — whether led by a Democrat or a Republican — is no different.
Washington's top priority is clearly to let the U.S. dollar fall in value, even if it ultimately means it will be replaced by a new world reserve currency. Their hidden rationale: It will inflate away the mountains of debts in this country by artificially raising asset prices.
In the first half of this year, the Treasury has stepped up its pace of borrowing to annual rates of $1.4 trillion in the first quarter and $1.9 trillion in the second quarter. That's 3.5 times and six times more than last year's pace, respectively.
Remember, the dollar is an abstraction representing a debt owed by a bankrupt government. As such, it has an intrinsic value of zero. Once it becomes obvious that the emperor has no clothes, we could see a serious loss of confidence that feeds back on itself.
There have been 28 episodes of hyperinflation of national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz (Professor Emeritus of Economics in the Center for Economics and Business (WWZ) at the University of Basel, Switzerland) has spent his career examining the intertwined worlds of politics and economics with special attention given to money. His conclusion: The tipping point occurs when a government's deficit exceeds 40% of its expenditures.
Guess what? The U.S. will hit the 40% mark in 2009.
What to do?
Right now, $1,000 invested in a 3-month Treasury bill yields a meager $1.20 in yearly interest. At that rate, just to match the 5 percent interest you could have earned on T-bills in early 2007, you'd have to leave your money sitting there for 42 years! What’s your tipping point? if your entering retirement like the boomers, you had better keep working.
U.S. savers are obviously getting shafted.
All told, that means that each and every household in America is now indirectly responsible for more than 1 MILLION DOLLARS in government debts and obligations. And that assumes no new government spending, no new social programs, no new wars, no new economic disasters or bailouts. Worse, it assumes no new deficits in the meantime!
Put another way, even if the government could somehow pay off that debt at the rate of $100 million PER DAY, it would take 3,446 years before the total government debts and obligations are paid off.
Think Debt:
Good news:
If government spends more – even if inefficiently – output goes up. In the last 60 years, the share of government output in GDP has increased from 21.4 percent to 38.6 percent in the US.
Dollar's slide lifts U.S. trade balance
The dollar's decline against other major currencies brought some good news with it in August. The U.S. trade deficit narrowed from $31.9 billion to $30.7 billion as imports declined and exports grew, the Commerce Department said. Los Angeles Times/The Washington Post (10 Oct.)
Bad news:
OK, Let’s talk about the debt problem again:
If you consider all of the structural problems in the U.S. economy, there has not been a lot of progress toward getting things back on track. The root causes of what created the near debilitating financial and economic crisis still remain:
Banks are still saddled with toxic assets,
Bank failures stack up: Now 106 for 2009
- Housing prices are still 30 percent lower,
- Foreclosures are still hitting new record levels,(foreclosures rose 44% this past month alone).
- Credit is still tight and demand for credit is still contracting sharply,
And now...
The budget deficit has ballooned, $1.58 trillion in 2009
And debt levels around the world have climbed.
The United States government is saddled with ...
• An officially recognized national debt of $11.8 trillion,
• Unfunded national obligations of $104 trillion!
• Another $9 trillion in cumulative deficits over the next ten years.
• Plus another trillion dollars for health care reform, no matter what bill finally makes it through Congress.
Grand total: $125.8 TRILLION of public debts!
To understand what's driving their approach to policymaking you have to see that their underlying principle is this: They are more afraid of a relapse in the economy than any big outbreak in inflation.
The Fed won't raise rates until unemployment starts dropping notably. St. Louis Fed President James Bullard went so far as to say that a falling unemployment rate was a "prerequisite" to boosting interest rates. His reasoning, huge excess capacity and additional job losses mean demand falls on its own. If you increase interest rates too to protect the dollar you risk more job loses and unhappy voters. And thus, we continue in the vicious cycle.
The problem with unemployment as an indicator is that unemployment is a lagging indicator. And inflation will get its toe hold before any shift in unemployment numbers, meanwhile consumers are hunkering down on their spending and saving rates, cost of living is going up, and banks are not making any new loans to business or consumers.
Overall unemployment rose to 9.8%, with the unemployment rate for men hitting a new post-depression high. The economy shed another 260,000 jobs in September and the previous figure for jobs lost in the recession was revised up by more than 800,000.
The banks aren’t buying into the phony recovery. Lending has fallen for five straight months
Out of 100 corporate bonds issued this year so far, 97 are stashing it away. Companies aren’t doing spending either, save for non-farm inventory relennishment after going "dry" for the previous two quarters.
In fact, Earnings season is now upon us and we expect it to be positive. Companies have had 3-4 quarters to make emergency adjustments to their business models, reduce capital expenditures, refinance debt at lower rates, cull workers, roll back compensation, pressure suppliers, improve productivity, jettison marginal operations and refocus on higher margin opportunities, like the suck-back before a tsunami wave.
We suspect those are some of the main reasons companies are "beating the Street" at this time; it is not due to improving end user demand.
Capacity now sits at 63%... and falling to cheep labor over seas.
So, be prepared to endure many more years of high unemployment, under-employment and declining real wages. Upwards of two million people are likely to lose their homes in 2010 and 2011. But the good news is that the economy is recovering and the banks are alright.
Domestic Economic bailiwick:
Up until the day, the investment bank, Lehman Brothers, collapsed in September of last year, it took the Fed a total 5,012 days — 13 years and 8 months — to double the cash currency and reserves in the coffers of U.S. banks.
In contrast, after the Lehman Brothers collapse, it took Bernanke's Fed only 112 days to double the size of U.S. bank reserves. He accelerated the pace of bank reserve expansion by a factor of 45 to 1. Now, just nine months later, the Fed has bought up a cumulative total of $924.9 billion in mortgage-backed securities (MBS). Simply put, the Fed has been buying up virtually all the junk and nonjunk mortgages it can lay its hands on.
Meanwhile, the private sector is getting killed...
Last year, banks provided new credit at the annual pace of $472.4 billion in the first quarter and $86.7 billion in the second. This year, they're not providing ANY new credit — they're actually LIQUIDATING loans at the rate of $857.2 billion in the first quarter and $931.3 billion in the second.
Ditto for banks and mortgages. Last year, mortgages were being created at the annual clip of $522.5 billion and $124 billion in the first and second quarters, respectively. This year, on a net basis, mortgages haven't been created at all. Quite the contrary, the Fed reports that, on a net basis, they've been liquidated at an annual pace of $39.3 billion in the first quarter and $239.5 billion in the second.
Getting cash out of credit cards and other consumer credit is even tougher. Last year, folks were able to add to their consumer credit at annual rates of $115 billion and $105 billion in the first two quarters. This year, in contrast, they've been forced to CUT back on their credit at annual rates of $95.3 billion in the first quarter ... and at an even faster pace in the second quarter — $166.8 billion.
Add to this the fact that Geithner has borrowed a mind-boggling $1.41 TRILLION to fund Washington’s debt addiction — nearly THREE TIMES MORE than the Treasury had borrowed at this time last year.
And still, this is only the beginning: The Congressional Budget Office (CBO) has warned that Obama’s budget will add nearly $10 trillion in new government debt over the next ten years.
Meanwhile, default notices, scheduled auctions and bank repossessions - were reported on 937,840 properties in the third quarter, a 5% increase from the previous quarter and an increase of nearly 23% from Q3 2008. “They were the worst three months of all time,” said RealtyTrac spokesman Rick Sharga.
U.S. residential foreclosures hit record high in Q3
During the third quarter, home foreclosures in the U.S. reached a record high. "They were the worst three months of all time," RealtyTrac spokesman Rick Sharga said. The firm said 937,840 homeowners received some form of foreclosure notice. The number is 23% higher than that of last year's third quarter, RealtyTrac said. CNNMoney.com (15 Oct.)
Commercial real estate is weakest sector in Fed's Beige Book
Weak or deteriorating commercial real estate markets were reported by all of the Federal Reserve's 12 district banks, according to the central bank's latest Beige Book. The Fed's regular anecdotal report found that the overall economy is still plagued by weakness in banking and increasing unemployment. Among the few bright spots in the report were observations of "stabilization or modest improvements" in manufacturing and housing. Bloomberg (21 Oct.) , Google/The Associated Press (21 Oct.)
The biggest single high-stakes derivatives gambler on Wall Street is Goldman Sachs: For every dollar it has in capital, Goldman Sachs is risking a whopping $9.21 on possible defaults by its trading partners, or more than TRIPLE the risk being assumed by the larger high-rolling champion JPMorgan Chase who, btw, currently controls 40% of the silver “market”.
So it should come as no surprise that, with the U.S. Federal Reserve virtually guaranteeing a Garden-of-Eden financial environment for banks, and Goldman has hit the jackpot this year on tax payer’s money: The bank has accumulated a bonus pool of an estimated $16 billion to dish out to an exclusive group of its heavy hitters.
Meanwhile, all across the USA, with small and medium-sized businesses unable to get credit or hire...
Food for thought:
1.
Europe is terrified of Russia, and the reason is: Liquefied Natural Gas.
Spain is especially dependent on natural gas, piped in from across the Urals.
Russia is threatening supply cuts this month. If that happens, the Spanish economy could be brought to its knees in approximately 45 days, bringing the rest of Europe with it in about 60.
2.
Water’s running out much faster than oil.
Blame mass migration. Migrants are flooding from farms to condos faster than they can be built in China. Add in over 70 million new people every year—a truly mind-boggling number.
3.
Closer to home, Canada's banks are estimated to be among the healthiest in the world, having avoided the subprime bubble. Canadian banks are hiring Wall Street investment bankers in droves. Canada is a resource-rich country and we expect a secular geopolitical shift of power in the direction of those nations.
4.
The cost of medical care in the U.S. is exceptionally high, at 16.5 % of GDP, dwarfing the 10.5% spent on housing and the 9.6% spent on food.
Quotes of the month:
1.
“A power has risen up in the government greater than the people themselves, consisting of many and various and powerful interests, combined into one mass, and held together by the cohesive power of the vast surplus in the banks.” — John C. Calhoun, Speech from 1836
2.
“Gold stocks are really a way to short government – or go long on government stupidity.” - Doug Casey
3.
This is a story about a 4-page letter written jointly by Congressman Alan Grayson and Congressman Ron Paul. It's addressed to Chris Dodd, Chairman of the U.S. Senate Committee on Banking. In it, they request that "the confirmation of Ben Bernanke be postponed until the Federal Reserve released documentation that will allow the public and the Senate to have a full understanding of the commitments that the Federal Reserve has made on our behalf." The headline of the story reads "Alan Grayson and Ron Paul Ask Whether Bernanke is "Fit to Serve"... and the link is here.
4.
"By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose." - John Maynard Keynes from 1920
5.
"...but what’s even more shocking is the fact that the interest of our [U.S.] debt will more than likely exceed US $450 billion for the fiscal year 2009 and that is significantly more than the estimated US $300 billion in tax revenues flowing into the government coffers. That means that the US cannot even service its debt without turning to the printing press." - Enrico Orlandini
6.
"More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other; to total extinction. Let us pray we have the wisdom to choose correctly." - Woody Allen
7.
“On Wall Street there have always been only two basic ways to make money… the second, and seemingly preferred method, exploit those who know less than you -- and take their money.” - Dylan Ratigan, anchor on MSNBC
8.
"My instinct was to want to short the dollar, but then I looked at other major currencies -- euro, yen and British pound -- and they might be worse." Picking these currencies is like choosing my favorite dental procedure," he said. "And I decided holding gold is better than holding cash, especially now that both offer no yield." - Larry Summers, White House economic adviser
9.
“Upon reflection, it’s quite obvious how tenuous it is to back up one’s currency with a pile of paper issued by another country, but this is exactly how the world of international currency has worked for decades. And it has worked quite well…until now.” – Eric Sprott
10.
“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” - Ernest Hemingway
Note to readers:
One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, my colleagues, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. I has been said, "When you take stuff from one writer it's plagiarism; but when you take it from many writers, it's research." In reference to my sources this month, they include in no particular order:
Martin Weiss/Money & Markets, Richard Young/Investorplace, David Galland, Larry Edelson, Doug Casey, David Galland, Ed Steer, Brian Hunt, Bud Conrad, Bob Irish, Chris Wood: Bloomberg; Google; CNNMoney; Associated Press; Los Angeles Times, Washington Post, Federal Reserve Bank of St. Louis.
